(June-2003) Seeing the light in art

With traditional asset classes under-performing, some pundits believe that art may start to look increasingly attractive to larger super fund investors, after attracting some attention from self-managed super funds.

Theoretically, art as a superannuation investment should be a good fit, suggests Fiona Hayward, senior painting specialist for auction house Christies.

She says: “Art should be looked upon as a long-term investment and this should go well with any superannuation fund’s investment strategy.”

Typically, investments in quality works of art, if held for the long-term, will produce higher than average returns, says Hayward.

For example, Christies sold the Mertz Collection of Australian Art in Melbourne in June 2000 for over $17 million, put together in 1967 for just $300,000. In total, the Australian art industry is worth over $3 billion to the economy.

While larger super funds in Australia appear to have shied away from investments in art, some corporate funds abroad have been known to invest in art.

The UK’s British Rail Pension Fund made 13.8 per cent in returns, 5.8 per cent above inflation, in the late 1970s. Like a stock portfolio, the fund diversified, putting 18 per cent into old master paintings, 11 per cent in old master drawings, and 10 per cent in each impressionist and Chinese art, for example.

The fund avoided contemporary artists and stuck to the best available in each sector. It sold a group of impressionist paintings, originally bought for $8 million, for $66 million, yielding a 21 per cent return. English silver brought 15.7 per cent each year.

Major companies have also been known to deal in art. In 2002, 16 pictures from the former National Mutual collection, now owned by insurance giant Axa Asia Pacific, raised $1.79 million.

In April 2001, AXA offered more than half its collection at auction and raised $2.39 million. The 13 paintings and five sculptures were part of a collection built up by the National Mutual insurance group before it was taken over by the French insurance giant AXA SA in 1995.

Most prudent advisers suggest art investment within a superannuation portfolio be done as part of a balanced portfolio that has a spread across a range of investments.

There is no limit on the amount an investor can spend on art for super. Simon Conquest, managing director of agents Artvestments, reckons that art could make up to 30 per cent of a portfolio, depending on expertise and other investments held.

But achieving an adequate spread may limit the amount of money one can invest in any individual work of art and this might limit or reduce expected returns.

In addition, artwork is now subject to GST, which is not only making it more expensive but is complicating issues concerning how you should invest in it.

Hayward says: “The big issue with holding art in a super fund is determining how the GST will be applied and whether you can claim any back.

“Clients are still feeling their way a bit on this issue and a lot of this revolves around whether the entity buying the artwork has an ABN or not, and whether they can claim the GST as an input. Artwork has never been taxed like this before so there are still a few questions that might need to be answered.”

Investors should also keep in mind that art investments usually do not generate any on-going income, which in itself can make it difficult to justify their inclusion in a super fund.

Some investors have tried to find their way around this, by renting out the works of art to businesses to hang in their offices and some more inventive investors have rented paintings out to their own businesses. This also solves the issue that works worth above 5 per cent of an investor’s fund cannot be kept in their home.

Kathy Bowler, financial planning adviser for CPA Australia, says: “Should you decide to rent the artwork out, it will either need to be at arm’s length to a non-related party, or you will need to show that the rental agreement is set at a fair market value and be confident that this assessment could pass an ATO audit should they do one.”

Rental income is set by Art Bank’s industry standard, and can be around 18-21 per cent a year, says Mark Widdup, proprietor and manager of the Cooks Hill Gallery, and an appointed Commonwealth Government valuer. This attracts 15 per cent tax when re-invested.

Looking at the positives of art investment, Brian Tozer, an art consultant at Bandamora Gallery, Katoomba, says a client who manages his or her own super fund can borrow from that fund to purchase a piece or collection of art, and in turn, lease them to the family or company at a negotiated rate. This lease amount is tax deductible and at the same time tops up the super fund to assist in further investments.

Other advantages for art investment are the liquidity and hedge against currency markets. Investors can buy anything from one painting to an entire collection and enjoy low maintenance costs, easy transfer and tax benefits.

Tozer says: “Investment in art for super funds is growing, becoming more common and more discussed. But it does not yet have the profile of more traditional areas of investment.”

There are actual outfits that advise on how to build a portfolio for superannuation funds. Names such as Lauraine Diggins Fine Art, Artvestments, and Maxim Consulting Services, will sell, swap and buy art on the client’s behalf. Artvestments deals in blue chip works such as those by Arthur Boyd, Sidney Nolan, and Brett Whitely.

The same principles of sound investment found in securing blue chip shareholdings, or real estate located to produce maximum appreciation, must be applied to art investment.

The selection and acquisition of artworks however, differs from acquiring shares or property, in that values are not as readily known. Widdup says returns depend on whether you buy exciting works from lesser-known artists, or those from established names, which, though more expensive, are safer investments.

Buying quality works by well-known artists is recommended, says Widdup. He suggests, for example, spending $100,000 to acquire one really worthwhile work, rather than 10 paintings at $10,000 each.

There is, it seems, a definite case to include art within a diversified, balanced super portfolio. But the key is to choose well and be prepared to hold it for the long-term.

But while art may appear an attractive investment, there are still a number of issues that superannuation trustees, and especially those of self-managed funds, should be mindful of before they start spending their funds’ money.

Bowler says: “Firstly, investing in art needs to be clearly defined in the investment strategy of the superannuation fund and it should be clearly stated that the investment is being held to provide for the benefit of the member’s retirement.”

She adds: “You will need to be able to justify any investment in art on these two grounds and it will be the Australian Tax Office (ATO) that will be asking you these questions and who you will have to convince.”

Bowler says investors will have to be able to show a good case for including any artwork. This might be, for example, that they work as an art adviser or collect a certain type of art, with specialist knowledge in that area.

The super fund and any lease agreement must be properly structured and documented in case of scrutiny by the ATO or Australian Prudential Regulation Authority.